3D Systems Proves It's No Gimmick

I've been beating the drum for some time now that the $1,000 price barrier will be an inflection point for 3-D printer maker 3D Systems (NYSE: DDD  ) . It was at that level that Hewlett-Packard (NYSE: HPQ  ) soared into the stratosphere with ink-jet printers, catapulting the company to enormous market share that it has really yet to relinquish. As 3D Systems closes in on that price, it looks like it's about to take off, too.

Yesterday's earnings report revealed sales surged 57% in the third quarter to $90.5 million while profits doubled. Organic growth was up 26%. The number of 3-D printing units actually sold more than doubled, which doesn't include its new Cube printer, while printing supplies jumped higher, as did service-related revenue. That underscores the significance of 3D Systems' installed base of printers as well as the price point they're offering them at. It now has a backlog greater than $9 million.

Investors Business Daily recently reported the Consumer Electronics Association says sales of 3-D printers will grow at a compound annual growth rate north of 31%, nearing $5 billion by 2017 as demand for the technology expands across all industries. 3-D Systems looks poised to capture a large portion of those sales.

3D Systems snapshot

Market Cap

$2.3 billion

Revenue (TTM)

$289 million

1-Year Stock Return

111%

Return on Investment

7.4%

Estimated 5-Year EPS Growth

19.6%

Dividend and Yield

N/A

Recent Price

$40.85

CAPS Rating

*****

Source: FinViz.com. N/A = not applicable; 3D Systems doesn't pay a dividend.

While 3-D movies have proved to be little more than gimmickry for the industry, 3-D printers are proving they hold real value. It's obvious 3D Systems sees the logic of driving down prices for its systems, even if it means the printers themselves offer lower margins. Yet despite a higher portion of its revenue coming from these lower-margin units, they've still managed to expand gross margin sequentially and by a full 350 basis points over the year-ago period to 51.8%.

Cut, print!
The key has been low-priced printers that are able to consume materials at comparable levels to higher-priced units. Like every other razor-and-blades business, the real money is made on the consumables. It's how HP, Lexmark (NYSE: LXK  ) , and Canon (NYSE: CAJ  ) still make money on their printers that they practically give away. Heck, when you run out of ink, it's almost more cost-effective to throw out the printer than by new ink jet cartridges.

While much of 3D Systems operations are focused on the consumer end of the business, it hasn't neglected the commercial side. Rival Stratasys (Nasdaq: SSYS  ) it generally seen as the enterprise-focused 3-D printer company, but 3D Systems recently introduced a large-format printer for commercial use that prints at twice the speed as the previous version; a new printer aimed at high-volume jewelry production; and an Air Force contract to transition specialty-engineered SLS materials and machinery into the production of F-35 and other weapon systems.

Maybe because I'd like to be printing out parts on my dining room table, I think the most exciting component is 3D Systems' consumer-facing printers. Its new $1,300 Cube printer comes with incredible functionality right out of the box, and using 3D's online technology, you really can be creating designs while eating dinner.

The fine print
Yet the company isn't cheap. It trades at 71 times earnings and 27 times estimates, and even its enterprise value goes for 45 times its free cash flow. I've rated the 3-D printer to outperform the broad market indexes on CAPS, the 180,000-member investor community where informed opinion is translated into stock ratings of one to five stars. While it's more than doubled in value since I rated it in January -- compared to an 8% rise in the S&P 500 -- I'm finding it difficult to recommend here at these levels.

By making a CAPScall on the stock, I hold myself accountable for the opinions I express here that you can then track in real time. But let me know in the comments section below whether you agree 3D Systems may soon print whatever profits it wants.

A sky-high opportunity
Three-dimensional printing has the potential to completely rewrite its industry, and The Motley Fool has indentified the "3 Stocks to Own for the New Industrial Revolution." 3D Systems and Stratasys are two of them, and you can download a copy of the free report now to find out who the third company is that will change the way companies operate as we know it.


Read/Post Comments (3) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2012, at 1:28 PM, 78rpm wrote:

    I enjoyed a 104% profit on this stock so I sold it a couple of weeks ago. I understand that short interest is around 20% of shares. After the shorts cover, I'd like to get back in for the long haul. 3D printing is a big growth business.

  • Report this Comment On October 26, 2012, at 2:40 PM, ScottCherf wrote:

    I have to disagree with 75rpm, the short covering on 3D will be so fast and violent that being on the sidelines is too risky. Yesterday the stock popped 20% intra-day on a stunning quarterly report and closed up 16%. Those moves are both impressive and frightening. 3D printing is the next industrial revolution and it's going to make the internet build out look like a fart in a sandstorm. Buy it now, this is a stock to hold. If the shorts push it down, buy more.

  • Report this Comment On October 26, 2012, at 4:41 PM, ingr72 wrote:

    I'm a big believer in DDD which came from the NASD where it had the symbol TDSC. It split 2-1 back in the spring of 2011 and I owned it then. Since following the articles on DDD I wound up buying some of it's major competitor SSYS ...

    After it's earnings report yesterday which the "Boys of Wall Street" seemed to like I will continue to hold both stocks ... The 3D Printer has so many different areas it could be used in, but the ones that blew my mind were in Dentistry, Healthcare, and Housing ... Watching the video of A 3D Printer building housing was incredible.... I'm in it for the long run, which I think it will have ...

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